In this episode of “Investment Management Foundations,” Ayako Yoshioka, Senior Portfolio Manager at Wealth Enhancement, analyzes and compares S&P 500 performance in 2024 and 20 years earlier in 2004.
VIDEO TRANSCRIPT BELOW
Hi. Welcome to another episode of Investment Management Foundations. My name is Ayako Yoshioka. I'm a Senior Portfolio Manager here at Wealth Enhancement Group. Today, I'm here to talk about the S&P 500 and how things were back in 2004 versus now in 2024. We've seen a lot of talk about The Magnificent Seven and how the seven companies have really driven the overall returns of the S&P 500 in 2023 and 2024. And when you take a step back, and we look at how concentration and composition of the S&P 500 has changed over time, I'll take you back to 2004. And the top 10 companies in 2004 were household names, as they usually are in the S&P 500. So, the names that were at the top of the S&P 500 Back in 2004 were names like Exxon, GE, Pfizer, Citibank, Walmart, J&J. And there were a couple of tech companies: Microsoft, Intel, Cisco, and IBM. If you fast forward to 2024, we now have many more tech companies. Seven of the top 10 are tech related. So, we've got Apple, Amazon, Alphabet, which is the parent of Google and YouTube, Meta, which is the parent of Facebook and Instagram. We have chip companies such as Nvidia and Broadcom. And then the three stocks that are not tech related: we've got Eli Lilly, maker of the weight-loss drug, and JP Morgan, as well as Berkshire Hathaway. And Berkshire Hathaway, their largest position is actually Apple. So, we've got a lot of concentration in a lot of tech.
And so people tend to worry, are we seeing another tech bubble like we saw in 1999? Well, the composition of these underlying tech companies has changed quite a bit. And we look, we see in this chart that back in 2004, profit margins were around 13%. If you fast forward to 2024, we now have profit margins of 31% in the top 10. That's a big jump. But it also means that these companies have continued to grow throughout the last several years. And they've been sustainable in their growth. Additionally, another way to look at this is the return on invested capital. And the return on invested capital is a favorite of investors because it really showcases how management teams, CEOs, CFOs are allocating the overall capital that they are in charge of. So, if they're allocating it to growth projects, those are then measured to see what kind of returns they're getting on those projects. The average return on invested capital in 2004 was 12.5%, and that has risen to 27.6%. In 2024, again, solid growth and solid returns out of these top 10 companies.
So, now that we have such strong companies, is there risk in the S&P 500 with these top 10 companies? The weight of these top 10 now in 2024 is about 33%, back in 2004, it was only 22%, which is still pretty high. So the risk is, is that if something goes wrong at all 10 companies, especially in the tech sector, where many of these companies are concentrated, the overall market could actually have an issue. However, there's another 490 stocks within the S&P 500. And we'll see how those companies can offset any of the potential hiccups that the top 10 might have. And that's been the case when everybody talks about the Magnificent Seven and the rest of the field, or the 493 that's still in the S&P 500.
So, it's good to remember that companies that exhibit a lot of strength do float to the top within the S&P 500 and become bigger weights within the index. And the risk is really when something goes wrong with those large stocks. However, there's additional stocks, and the universe is very large. So we'll see how each and every single stock contributes to the overall market performance. Thank you again for joining us today. And please come back for another episode of Investment Management Foundations at Wealth Enhancement Group.
This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.
